Explaining Auditors Going Concern Decisions: Assessing Managements Capability

Abstract

This study investigates the ability of nonfinancial variables to aid in the explanation of auditor going concern opinion decisions. The nonfinancial variables measure the quality of client management, defined in terms of its capability. A sample of twenty-nine financially troubled firms was investigated, using a lengthy questionnaire incorporating financial data, observations, and judgments about the clients management personnel. Auditors responded to the questionnaire referring to the audit work papers for each client as a data source. Using LOGIT analysis, particular combinations of specific nonfinancial data were found to accurately discriminate between those firms receiving and non receiving going concern modifications to the audit report. The results indicate that nonfinancial variables as a class aid in explaining auditors going concern opinion decisions.